Sacrificing the Public Option

Contrary to some overwrought reactions on the left, if a public insurance option fails to make it into this year's health-care legislation, it does not spell the end of worthwhile reform.

The president and Secretary of Health and Human Services Kathleen Sebelius have been entirely correct in saying that the public option is only a small part of the reform effort. The general framework for health insurance that Democrats are advocating does not depend upon a public option. And if a public plan is enacted, it may be so compromised that it could backfire on reformers and become a high-cost alternative rather than the cheaper option that progressives are hoping for.

Because the public option has stood no realistic chance of being enacted in the form it was conceived, its main value all along this year has been as a bargaining chip. The proposal will now have served a valuable political purpose if, by sacrificing it, the White House is able to provide enough cover to Democratic senators from red states to get a bill out of the Senate Finance Committee, through the upper chamber, and into conference with the House.

The Republicans have focused their opposition on the bugaboo of "government-run health care." By jettisoning the public plan, swing Democratic senators can tell their constituents that they prevented a government takeover. This argument will not sway die-hard right-wing voters, but it may suffice for many others and thereby help give those senators confidence they can vote for the bill.

Some liberal members of Congress are still insisting the public option must be part of health reform. They should continue to say so -- their protests may make the ultimate concession all the more valuable. But if any of them actually do vote against the final bill and prevent it from passing because it fails to offer a public option, they will help to ruin the best chance in years to put health care on a path toward reform. And they will do severe damage to the presidency of Barack Obama.

Even the bills in Congress that include a public option would not make it available to everyone. The public plan would be one of multiple options in new health-insurance exchanges to be created for individuals and small employer groups.

Currently, individuals and small business buy health insurance under extremely disadvantageous conditions. Not only do insurers deny coverage for pre-existing conditions and set rates on the basis of an individual's medical history (practices that would be eliminated under reform); in addition, brokerage fees and "medical underwriting" drive up the cost of premiums. In the individual market, only 60 cents of every premium dollar goes to pay for health care; the remainder is absorbed by nonmedical expenses.

As a result, individuals and small employer groups have an enormous amount to gain from a more efficient system. Creating that system -- a fairer and more efficient market for insurance -- is the main purpose of the exchanges and related reforms. Even without a public plan, that system, along with subsidies to low-income people so they can afford coverage, is a worthy goal.

In making the case for a public plan, reformers often compare the relatively low administrative costs of Medicare with the much higher overhead of private insurance. But besides eliminating brokers' fees and medical underwriting, the exchanges will assume much of the cost of enrollment for the private plans as well as the public option. In addition, unlike traditional Medicare, which benefits from being the default option for the elderly, the new public plan would have to advertise to compete effectively. So the differential in administrative costs between the public option and private insurers would be much less in the exchanges than the comparisons of Medicare and private insurers in the current market suggest.

The original idea for the public plan, however, called for it to drive down costs below those of private insurers by another means -- paying doctors and hospitals at Medicare rates, which run 20 percent to 30 percent less than what private insurers pay. Modified versions of that proposal call for the new public option to start out by paying providers at Medicare rates plus 10 percent.

Either way, however, this proposal meets the united opposition not just of the insurers, but of the providers as well because it would result in a massive reduction in revenue for them. Realistically, if a public option does pass, it is not going to take that form.

Yet while denied the ability to flex its pricing muscles, a public plan could well be saddled with higher costs than other plans because of the health profile of its enrollees. Private insurers have spent decades perfecting the art of attracting the well and avoiding the sick. As the annual open enrollment approaches, for example, insurers will strive to re-enroll their current healthy low-cost members, while letting the sicker ones migrate to other plans. The public option, however, would likely refrain from using practices of this kind, and its costs would be correspondingly higher. Instead of being outcompeted, the private insurers could use the public plan as a dumping ground for the sick.

Some provisions in reform legislation attempt to mitigate this risk. The most important of these calls for "risk adjusting" payments by the exchanges to the plans -- that is, providing a bonus to plans that enroll a sicker population and paying proportionately less to plans that enroll a healthier group. But it would be a mistake to think that such methods can completely avert the danger that the public plan will experience higher costs. As a result, just to break even, the public plan might require higher premiums than private insurers charge.

Another reason not to regard the public option as the decisive issue is that it is a separable proposal that could be enacted after the exchanges, insurance-market reforms, and subsidies are passed. Some other provisions of the reform package aren't separable. For example, Congress can't tell insurers they have to cover pre-existing conditions unless there is an individual requirement (or mandate) to buy insurance. Otherwise, people would rationally not buy coverage until they get sick, and the whole insurance system would break down.

But the public option is not like that. The exchanges can be established first, and the public option added later. Under the current bills, most of the provisions would not be carried out until 2013. Any health legislation that passes Congress this year is almost certainly going to be revised, possibly even before it gets implemented.

Moreover, there is a tactical rationale for separating the public option from the rest of the legislation. The exchanges and other insurance-market reforms should be passed as ordinary legislation, which in the Senate requires 60 votes (because of what has now become the routine, unconscionable use of the filibuster). Shorn of the public option, the legislation is more likely to pass that hurdle.

But at some later time, the public option could be added as part of budget reconciliation, which would then require only 50 votes in the Senate. To be part of reconciliation, a proposal would have to show budgetary impact. And a public plan paying Medicare rates or Medicare rates plus 10 percent could pass that hurdle.

So my advice to progressives is to chill, at least on this matter. To get health-care reform through the Senate, the public option is almost certainly going to have to be dropped. Perhaps, after House-Senate conference, some version will survive; for example, if the House bill includes a public plan and the Senate bill includes health co-ops, a logical compromise would be to give states a choice between them. But if no public option survives this year, it can be enacted separately later.

If health-care reform passes this year, a lot more will need to be done to make it work. But if it dies this year, it will be very dead indeed. The opponents of reform understand that, and the supporters must too.

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